Employment-Based Health Insurance: A Look at Tax Issues and Public Opinion

This Issue Brief provides background information on
the employment-based health insurance system and its alternatives. The report discusses
the advantages and disadvantages of the current employment-based health insurance system,
the current tax treatment of health insurance, and the strength and weaknesses of recent
proposals to introduce tax credits. It presents findings from the public opinion survey
conducted by the Employee Benefit Research Institute on public attitudes toward health
insurance and summarizes recent research on the effects of tax changes on employment-based
health benefits and the uninsured.

Employment-based health plans are the most common source
of health insurance among nonelderly individuals in the United States, providing coverage
to nearly two-thirds of this population in 1997. Health insurance is probably the benefit
most used and valued by workers and their families. Sixty-four percent of respondents to a
recent survey rated employment-based health insurance benefits as the most important
benefit.

Despite essentially five years of very low health care
cost increases and the recent increase in the percentage of Americans with
employment-based health insurance coverage, the uninsured population has continued to
rise. This has resulted in a new interest among policymakers in finding ways to reverse
this trend. One question that continues to be asked is whether the employment-based health
insurance system is the appropriate mechanism for expanding health insurance to the
uninsured.

Employment-based health plans are popular because they
offer many advantages over other forms of health insurance and types of delivery systems.
However, there are also potential drawbacks to the employment-based system. The advantages
include reduced risk of adverse selection, group-purchasing efficiencies, employers acting
as a workers' advocate, delivery innovation, and health care quality. The disadvantages
include an unfair tax treatment, lack of portability and job lock, little choice of health
plans, and lack of universal coverage.

The tax credit proposals for health insurance, which come
in all shapes and sizes, would either enhance the current employment-based health
insurance system or put it at risk. This has potentially enormous public policy
implications, since the vast majority of Americans get their health insurance coverage
through employers. Such a change may also have political implications, as public opinion
currently may not support such a fundamental change in the U.S. health insurance system. A
recent public opinion survey conducted by the Employee Benefit Research Institute found
that 68 percent of Americans with employment-based health insurance were satisfied with
the current mix of benefits and wages.

The EBRI survey found that under a changing tax code scenario, there is still
strong support for the employment-based system. Strong support for the employment-based
system may be the result of respondents' lack of confidence in their ability to choose the
best health plan if their employer stopped offering health insurance.